Banking And Finance

Utah Business Staff

January 1, 2013

One of the issues bankers have to deal with is where interest rates are headed. Do you see interest rates changing? Do you see inflation coming back?

SUTTON: There is a real risk that rates could take off. They haven’t because, relatively speaking, everything around the U.S. is in such trouble that everybody is fleeing to the U.S., and we can sell government securities, for example, at record low interest rates. But it’s a very scary situation.
If you consider that today, 6 percent of the federal budget is just paying interest on the debt—and this at record low rates. If that rate were to go back to more normal interest rates, let alone become inflated, all of the sudden that part of the federal budget balloons to the point where it could bankrupt the federal government. It could grow as big as Social Security or defense spending. We’ve got to grapple with this.
My sense is the underlying economy is sound and it would take off if the circumstances were appropriate. But right now with all the uncertainties in Europe and the federal deficit, the regulatory situation, everybody has fled to a safe harbor. Credit is not flowing. Credit drives the economy, so to keep the economy going, the federal government is deficit spending. That can’t go on for too much longer. Many people have retreated into a safe harbor and are sitting there waiting to see how these things are resolved before they move out. Once they get resolved, then it can take off.

LEARY: I don’t see it changing between now and ‘14 and into ‘15. There always remains the threat of inflation to hyperinflation. At this point that is still not evident. And as long as we are bumping along here in our economy, not going anywhere real fast, I don’t see that point of inflation taking off.
Now the potential, as George said, once it does, yes. It could be hyperinflation if we are not careful. Bernanke’s term is up at ‘14. So whoever is pulling the levers in ‘14, ‘15, they have a dicey game to play.

SHUMWAY: I pray for China every night. They keep buying our debt. And at the same time, the legislature can’t come to grips with really hard decisions. The only thing that is going to break it loose is the next mid-term election, when some people may change just for political reasons to get things going.
But deleveraging is very, very hard. You know, my kids are under 40 and they have got to live until they are 107 to get out of Social Security what they are going to put in. And with this debt, we are all going to have to get used to something different. And that’s very, very hard.

BEARD: I’m less optimistic, although I agree that Utah is in a bit of a bubble and is somewhat contained. But that can’t last forever. We talk about the trillions in debt. If we really look at the accounting of what commitments we have made, we are talking in the hundreds of trillions of dollars—the off-balance sheet financing that, frankly, if we booked it the way that the government does in our banks, we would all be in jail. It’s horrifying to me.
That which is unsustainable will end. Politicians can artificially kick it down the road a little bit but at some point it will come home. There’s natural laws of economics and we will have to suffer the pain of those at some point if we are unable to deal with it.
In the short run, I agree with a lot of what’s been said. I think we have a chilling effect on businesses. We also have a major issue between a planned economy and a free market economy, and we are tinkering with it in dangerous ways, in my opinion. We are artificially dealing with interest rates. When those come back to a more natural level, we will have a dramatic change in what’s going on. You see it in QE3 and other artificial stimulus. But in the long run, you have to look at where it is taking us, and it’s a frightening thing.
In the short-term we can work our way through it. Businesses are resilient; they have to operate. Our bank is very much lending. There are not a lot of business people that are being real bold in this kind of environment. And the ones that are, we all compete to try and get those, which drives down the interest rate, which is a free market thing, if it wasn’t artificially stimulated by the Fed.

TAYLOR: The longer term you try to look down the road, the fuzzier it gets and the harder it is to know. I tend to agree with Rick that there are some serious issues long term that have got to be grappled with. There’s going to be some pain to be borne long term at some point.
However, shorter term, as fuzzy as it still is, it’s a little clearer. Regarding the next five or 10 years, I’m more optimistic. There’s more I don’t know than I do know, but one thing I know is that business cycles are cyclical. And cycles are different from one another, and yet they partake of some of the same traits.
I am persuaded there is a huge amount of pent-up demand. The baby boomers have got a lot of money on the sidelines and it’s waiting to go to work. But it’s waiting for some glimmer of hope that it’s time to come off the sidelines.
I believe they actually started coming off the sidelines earlier this year, from my personal experience at our bank. This year, the storm clouds moved away and the sunshine started coming through. Not in an active dynamic way like in the boom days. But people’s fear tended to dissipate. Things started moving. And that’s going to continue despite Europe, despite the fiscal cliff, despite a business-unfriendly administration in Washington. With some speed bumps and other problems down the road—some of which may be fairly big bumps—we are headed into a recovery phase of several years.